This is pretty much my take on the whole thing, although I actually don't know the debate in detail (something I know I should clarify now before someone like Robert Vienneau comes by and challenges me on it):
"“Cambridge UK” (i.e. Joan Robinson) believed that this destroys
neoclassical economics and that only Sraffian economics had a way to
explain interest rates correctly. This is because, if you present
entrepreneurs as deciding between two production methods (one
labor-intensive and the other capital-intensive), they may sometimes
find it profit-maximizing to switch back and forth between the capital intensity as the interest rate shifts.
This means that there is more than one interest rate corresponding to
an allocation of capital, in turn meaning that the interest rate is
determined by arbitrary institutions, not the logic of marginal
analysis. Of course, this is all an artifact of the algebraic
formalization of the problem in the first place; the same mathematical issue comes up if you try using things like internal rate of return.
The response of people who know cost-benefit analysis is that you
shouldn’t use internal rate of return. Similarly, most people would see
this as demonstrating that you shouldn’t take the concept of marginal
efficiency of capital too seriously. “Cambridge US,” despite its
infatuation with formalistic Samuelsonian methodological descriptivism
(say that five times fast), kinda understood that such modeled results
are cute but not particularly meaningful. “Cambridge UK,” because it was
a group of Marxists, was giddy to find any excuse to say that interest
rates are too high and the system is unjust. Which is why they still
won’t shut up about it and mainstream neoclassical economists don’t care
about it." (emphasis added)
The bit about Marxism is particularly insightful. If you ever get the chance to read a little Marxist economics (as opposed to some other Marxist work), it's incredible how riled up they get over a little algebra. Actually it's reminiscent of a lot of the MMT people, with one exception: MMTers actually do work with data a lot and get into some behavioral discussions around what drives financial markets. In other words, they check the data and think more about microfoundations and don't just take some algebra for granted. The theory is (predictably) more useful as a result.
I think Samuelson just liked playing around with the math, because he got involved in the transformation problem and the Marxists too.
I should probably stop here because as I said - I'm only vaguely familiar with all of this. But Ryan's response rang true for me. One bit of Marx I have read in much more detail is his work on Say's Law. That is actually quite good, and in a lot of ways better than Malthus's writing on it (which is also quite good).
Saturday, September 8, 2012
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Why do neoclassicals see only the reswitching problem when they study the CCCs? We can put it aside, but the point that political distribution must be known before prices can be calculated still stands, and subsequently so does the point that prices are not determined by supply and demand.
ReplyDeleteI could take issue with his treatment of reswitching and his branding of Cambridge UK as marxists, but really it's just important that we establish the CCCs were so much more than this
"the point that political distribution must be known before prices can be calculated still stands, and subsequently so does the point that prices are not determined by supply and demand."
DeleteWhy? In equilibrium, everything is determined simultaneously, but that doesn't imply that supply and demand are meaningless.
My understanding of CCC is that particular claims about monotonic, one-directional causality running from value of capital to rate of interest are not well justified theoretically. And maybe neoclassicals really were claiming such things half a century ago. But in that case, what CCC proves is that those particular claims are wrong, nothing more.
I agree that wealth distribution affects everything else.
DeleteNow, realistically, how can a more even wealth distribution cause the average-profit rate to fall? That's the interesting question.
Daniel if you're curious here is my take on the reswitching debate.
ReplyDeleteUnlearning Econ I don't think you're right that Sraffian analysis shows the limits of marginal analysis. He only gets that by omitting optimizing consumers from the model.
2 points. The first is what economists say to their critics.
Delete(1) Sraffa's model is intended as a tool to tell us something about the economy. He adopts a certain perspective and that perspective may not have certain elements in it. But there is nothing special about optimising consumers and there's no reason they should be in every model.
(2) More substantively, I don't think it would be too much of a problem to introduce some form of preference into Sraffa's model. The economy must satisfy Sraffa's reproduction constraints, and also some constraints based on what people want. I'm not going to offer a mathematical blueprint (because I can't!) but I tink you are implicitly presenting a false dichotomy.
Bob: BINGO!
DeleteSuppose, at one extreme, people didn't care at all about when they consumed stuff. Do time preference proper, no diminishing marginal utility, just maximise consumption whenever. Then all (real safe) rate of interest would be 0%.
Suppose, at the other extreme, people didn't care about their future consumption at all. Then all asset prices (except for those assets that could be eaten immediately) would be zero and interest rates infinite.
So we see a debate about what determines interest rates between Cambridge UK and US, when both sides ignore time preferences?
Unlearning: "The economy must satisfy Sraffa's reproduction constraints, and also some constraints based on what people want."
DeleteI disagree. It is not written in stone that any economy has to satisfy Sraffa's reproduction constraints. It is written in stone that people will not do what they don't want to do, given the choices available to them. Suppose we start with an economy that does satisfy Sraffa's reproduction constraints. Now suppose people's preferences change, and they want more or less consumption today relative to all future periods. The prices of existing assets will change, and will be expected to keep on changing in future. Will there eventually be a new steady state? That depends on preferences (and technology and expectations too).
But given a certain set of choices, the economy must be able to reproduce itself to satisfy, no?
DeleteBtw, Bob (and Nick), Robert Vienneau has some papers that use utility maximisation in a Sraffian setting:
http://robertvienneau.blogspot.com/2012/09/elsewhere.html
I'll leave further discussion to your blog, Nick.
The "interesting" 1970s wallpaper that my parents once had in their house in no longer made. So, the economy since then has not reproduced itself.
DeleteSraffa and his followers try to paper-over marginalism, they do that by two means. Firstly, by generalizing consumer goods, creating "corn economy" models. And secondly by removing all marginal trade-offs except those involving employment. By these means the labour-theory-of-value can be restored. But, why should we bother with all this fiction when we have marginalism.
It's only necessary to go back there if real practical examples of re-switching and capital-reversing can be found in practice. But, few have been found, at the low rates of interest that prevail in the real world they're unlikely to occur. Any production process that can benefit from being shortened will be shortened in the long run, because research will concentrate on that task. As a result the time vs output trade-off that Bohm-Bawerk assumed will probably always occur in practice.
Sraffa's logic can be applied to offer a strong critique of the LTV, so I'm not sure what you're getting at here and below.
DeleteAnd again, reswitching isn't the main conclusion. The main conclusion is about income distribution and political power.
Also, economists love ceteris paribus. So why can't we hold preferences constant?
There are ways to criticize neoclassical growth theory and different ways to criticize the labour-theory-of-value. I'd argue that that latter are stronger than the former. But, the problem is without one or the other of them there are big pieces missing in a framework needed to construct an overall view of economics. Now, maybe there are ways to rectify that. It may be possible to come up with a system that depends less on arbitrary assumptions than either of those systems do, I have a few ideas about that. But, some system or other is needed. Economists won't accept a situation where one isn't present. That's why it took marginalism so long to catch on, a fairly complete system had to be constructed before anyone would take it on. That's all quite reasonable in my view, it's often better to carry on with an inaccurate but complete theory than to migrate to a theory that's more accurate but leaves large areas out of it's scope.
DeleteYou're right that we can hold preferences constant, but not in the long-run. That would be like applying simple ceteris paribus logic - like say supply and demand - to the long-run. Even if consumer preferences are held constant we can't in any realistic way hold technology constant. Changes in technology constantly change trade-offs.
BTW R.V. claims that I made mathematical errors in both articles. I don't think I did--meaning, I didn't say something that was mathematically false--but it's possible the way I tried to deal with Samuelson/Sraffa wouldn't hold up in a general debate, with minor tweaking of what I took to be their positions.
ReplyDeleteMatias Vernengo's summary might be a good first step towards understanding the debate in detail. Also, the thing about them being Marxists is pretty silly; Sraffians and Marxians appear to be as bitter rivals as you'll find.
ReplyDeleteDaniel: I am a little confused on one point. What is the neoclassical conception of how profit relates to interest? For example, the CCC summary on wikipedia includes a quotation from John Bates Clark that includes "interest [i.e., profit]." Are these things just assumed to be equal? Because if we're really going to describe the UK Cambridge school as Marxists in any capacity, then we'd need to be sure to know that in Marxian econ, equalization of aggregate interest and profit rates is not something to be assumed, as it has pretty serious implications; it's not an equilibrium position (but then there really isn't an "equilibrium" in Marx), but in fact can play a role in triggering a crisis.
The difference between Sraffians and Marxists is mostly the "narcissism of small differences". Though for this debate it's quite relevant.
DeleteAs I read it the debate about whether there is really entrepreneurial profit, and hence whether the long run interest rate differs from the profit rate is a separate issue. I can see why Marxists would disagree though.